Banks Must Examine MSME Restructuring Claims Before Proceeding Under SARFAESI: Calcutta High Court

The Calcutta High Court has recently held that once an MSME borrower raises a restructuring claim in reply to a SARFAESI demand notice, the bank cannot carry on with recovery proceedings without first taking a decision under the RBI's revival framework.

Justice Krishna Rao said the obligation on the bank is mandatory when such a claim is made with reasons and an affidavit.

“It is mandatory on the part of the bank that, in reply, if the borrower claims benefit of the FRAMEWORK with reasons and affidavit, the bank is bound to look into the claim of the borrower,” the court said. Till then, further action under SARFAESI must remain in abeyance.

The dispute involved Bizitza Retail Ventures Private Limited, a registered MSME. The company had availed cash credit facilities of Rs. 4.95 crore from the Central Bank of India. On June 24, 2025, the bank informed Bizitza that its account was under SMA-2 due to non-payment of interest and would be turned into a non-performing asset the next day if the dues were not cleared. Two days later, on June 26, the bank issued a demand notice under the SARFAESI Act, seeking recovery of Rs. 5,126,423.67.

In August, Bizitza replied to the notice. It told the bank that the RBI's Framework for Revival and Rehabilitation of MSMEs had been violated. It also relied on the Supreme Court's ruling in Pro Knits v. Canara Bank, which held that banks are required to follow the MSME revival framework before classifying an MSME account as a non-performing asset. Despite this, the bank withdrew the June notice and issued a fresh demand notice on September 6 for Rs. 5.22 Crores.

The bank's stand was that no formal request for a Corrective Action Plan or restructuring had ever been made. Relying on the Supreme Court's later ruling in Shri Shri Swami Samarth Construction, the bank argued that it could proceed under SARFAESI as it had no conscious knowledge of the borrower's MSME status and no affidavit-backed claim had been filed.

The High Court did not accept this approach. Justice Rao noted that although the borrower had not expressly sought restructuring in so many words, it had clearly flagged the violation of the statutory framework in its reply.

“On receipt of notice dated 26th June, 2025, the petitioners, though, did not categorically requested the bank for consideration of its case under the FRAMEWORK but have stated that the bank has violated the notification dated 29th May, 2015 and the order passed by the Hon'ble Supreme Court in the case of Pro Knit (supra),” the court observed.

The court also noted that the bank admitted Bizitza was an MSME and raised the defence of 'no restructuring request' only after the Supreme Court clarified the law in July 2025.

In light of this, the Court directed the MSME borrower to file a formal claim with an affidavit within one week and asked the bank to examine it under the MSME framework. The recovery proceedings is kept in abeyance till the decision is taken

For Petitioners: Advocates Chayan Gupta, Niladri Banerjee, Debayan Ghosh, Abhidipto Tarafdar, and Deepankar Thakur

For RBI: Advocate Suchismita Ghosh

For Respondents: Advocate A. Rao